CHOMPING AT THE BIT

INDUSTRIAL OUTPUT: STARTING TO FLEX

We received further confirmation overnight from China that the stimulus package is having an impact. Industrial output increased at a rate of just 3.8% in the first two months on 2009; following December’s 5.9% and November’s 5.4% clip. February rose 11% on its own however, a figure heavily skewed by the placement of Lunar New Year (which increased the number of working days), but the data still suggests that the pace is picking up for heavy industry. Major signals of this increase in activity included a 39.13% Y/Y increase in cement production and a 22.9% increase in automobile output.

The increase in cement manufacturing is directly correlated to the larger than expected growth in fixed asset investments which we discussed yesterday in depth. As the government has increased its infrastructure projects the impact on heavy industry is being felt rapidly -for example the announced tripling of railroad investment spending which helped drive an increase in steel production during February.

The pickup in automotive production is evidence that consumer demand has not completely disappeared. Sales of domestically made vehicles rose 25% in February according to the China Association of Automotive Manufacturers following the reduction in the sales tax on small cars, part of November stimulus program. Further government action -such as a program to subsidize vehicle purchases by farmers, are expected to take effect this month. The fact that a government incentive got Chinese consumers making major purchases is a massively positive data point for the automotive industry as it continues to consolidate an expand.

Clearly the combined YTD output data, the lowest growth rate in 5 years, is an unwelcome reminder of how bad the external demand picture is for China’s critical export industries. We continue to be bullish however, and view the positive data points emerging from the heavy industrial sectors as a signal that the stimulus plan is working and that the pace of growth will return to higher levels in the coming months. It’s a hard road ahead, but the Ox has the brute strength to get the job done.

RETAIL SALES: BETTER THAN BAD

The National Bureau of Statistics released data showing that growth in retail sales contracted in January and February, increasing 15.2%, compared to a 20.2% increase in the same period last year, signaling a continuing trend of slowing demand. This is the third straight decline, following December’s 17.4% growth and 22% in October. Consumption was 2 trillion Yuan ($290billion) during the first two months of 2009. Retail sales for 2008 were up 21.6% when Chinese GDP growth was approximately 9%, slipping into single-digit growth for the first time in six years. Retail sales in urban areas increased by 14.1%, Y/Y, while sales in rural areas increased 17%.

This data, while underscoring the fragility of the developing Chinese consumer base, is still better than bad on the margin. We are taking a somewhat contrarian view in arguing that still-double-digit growth levels in consumer spending, combined with the signal sent by automotive sales, suggest that consumers can still be coaxed back into the market. Obviously, with deflationary pressure and rising unemployment, retailers are not even close to being out of the woods yet -we will be following the situation closely.

CREDIT & INVESTMENT: STARTING TO FLOW

Official credit data released last night confirmed the estimates we referenced in yesterday’s post. The People’s Bank of China reported that banks extended 1.07 trillion Yuan in new loans in February, as state companies and government agencies borrowed to finance stimulus projects - a 30% Y/Y increase. This follows January when a record 1.62 trillion Yuan of new loans were extended to finance the increase in investment, increasing total outstanding Yuan denominated loans to 33 trillion Yuan by the end of February, 24.2% higher than the previous year, as M2 reached 50.7 trillion Yuan. At the same time, Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC) requested that lenders increase their provisions to 150% of their non-performing loans, up from 130%, as a precaution over solvency risks -suggesting that the reality of defaults in the face of massive export contraction is being prepared for proactively, a positive signal.

The Ministry of Commerce has announced that going forward; provincial commerce officials will have the power to authorize the establishment of foreign owned ventures and inflows of foreign direct investment (FDI). These officials will also have the power to approve foreign acquisitions up to $100 million, although foreign strategic investments in listed Chinese companies will still require approval by the central government. This move is in direct response to the four straight months of contraction in FDI, which fell 32.6% in January, Y/Y, as capital flows essentially dried-up globally.

The active encouragement of increased foreign investment, coupled with decentralization that could expedite the process significantly strikes us as a very positive development which, when coupled with the expansion of credit and proactive risk management measures adopted by Beijing show the government’s firm commitment to meeting growth targets.

We have been bullish on China consistently since December of 2009 and remain so – we are long China via the CAF closed end fund.

Andrew BarberDirector

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03/12/09 08:13 AM EDT

REMINISCENCE OF A BEAR MARKET OPERATOR

"The game taught me the game."-Jesse Livermore

As
you might imagine, I get a lot of emails throughout the day. Feedback
is greatly appreciated and I'd like to thank everyone who continues to
enrich our exclusive research network for their great questions. In
this ever so globally interconnected market place of interacting
factors, I am a firm believer that collaboration wins. As my Partner,
Daryl Jones, reminded me yesterday, "in the long history of
humankind... those who learned to collaborate and improvise most
effectively have prevailed" (Darwin).I
am on the road this week, but I have my trusty notebooks with me, and
the aforementioned 'Reminiscence of a Stock Operator' quote taped in
the insert of one of them. If you want to throw me off my game, steal
my notebooks - they help me proactively prepare and plan for my every
move.I
was fortunate enough to first cut my teeth in this game in the
Baby-Bear market of 2000-2002. What we have here in 2008-2009 is much
more akin to Papa-Bear, and one has to sleep with one eye open to be
sure not to get mauled by him. While we made a decent Bear Market
trading call in the last few weeks, I will not mistake this for
anything other than what it was - a Trade.One
of the better risk managers I learned from in this business used to
always say, "keep a trade a trade" - and as are most rules/patterns
that govern dynamic systems within the mathematical spheres of Chaos
Theory, that one is very simple. I don't make a habit of violating it.Yesterday,
I sold into the proactively predictable follow through squeeze that Mr.
Market offered up to us, partly because I am human and I, like most,
fear missing large short term percentage gains... bear market rallies
tend to go too far too fast, however - history's lessons are crystal
clear on this front.I
know, I know... a lot of people out there fancy themselves as
"investors for the long run", and I respect and appreciate that
strategy, provided that they are not buying SP +57% higher than
Monday's low, and selling 2009 consensus Bear Market fear (yesterday's
weekly II Investor Sentiment Survey showed only 26% of Institutional
money managers admitting they are bullish - bears were reported up
again at 47%!). In today's game at least, I consider "trading" the most
impactful risk management strategy one can employ. Talking about risk
management doesn't do you any good unless you act on it.I
cut our Asset Allocation Model's US Equities position down from 24% on
Monday to 12% by yesterday's close. The SP500 is up +6.7% over the span
of the last 48 hours, and I think most people would be looked on pretty
kindly if that was their reported annual return for either 2008 or
2009... so I don't lose too much sleep in booking some of it. I am
still long the SP500 via the SPY etf, but I sold out of my position in
the Nasdaq (QQQQ) for a healthy gain.For
the last 4 trading days, I have started off our Macro client 830AM
strategy call saying that the reward in being long the US stock market
was outstripping the risk. This morning, the immediate term Trade's
risk/reward is balanced for the SP500 at +3% upside versus -3%
downside. For the Nasdaq, the risk outstrips the reward by one percent
at -3% versus +2% upside.If
you're looking for what my notebook says on critical support levels for
both the SP500 and the Nasdaq, I'm at 703 and 1329, on those broad
indices respectively. As the facts/math within this game changes, I
will. All the while, expect me to keep my feet moving out there - when
Bears are chasing you, standing still with a bucket full of fish in
your hands of positive Macro ETF gains is not what I recommend...My
Asset Allocation to USD denominated Cash has been the beneficiary of
selling down US Equity exposure. I'm now back up to 69% Cash, and that
position makes me nervous. Why? well, because the one thing I hear most
frequently from my friends in the hedge fund community is how much Cash
they are in. That, as John McCain would say, "my friends" is consensus.
I
am from Thunder Bay, Ontario. Bears don't scare me - but consensus
does, to a fault. I guess that's a personal thing that I have to live
with. Jesse Livermore reminded us all that "the game does not change
and neither does human nature."May the game continue to teach us the game, and God Bless this country's brave Bear Market Operators.KM

LONG ETFSEWA - iShares Australia-EWA
has a nice dividend yield of 7.54% on the trailing 12-months. With
interest rates at 3.25% (further room to stimulate) and a $26.5BN
stimulus package in place, plus a commodity based economy with
proximity to China's H1 reacceleration, there are a lot of ways to win
being long Australia.

USO - Oil Fund-
We bought oil on Friday (3/6) with the US dollar breaking down and the
S&P500 rallying to the upside. With declining contango in the
futures curve and evidence that OPEC cuts are beginning to work, we
believe the oil trade may have fundamental legs from this level.

SPY - SPDR S&P500- We bought the etf a smidgen early, yet the market indicated close to three standard deviation oversold.

CAF - Morgan Stanley China fund -
The Shanghai Stock Exchange is up +17.2% for 2009 to-date. We're long
China as a growth story, especially relative to other large economies.
We believe the country's domestic appetite for raw materials will
continue throughout 2009 as the country re-flates. From the initial
stimulus package to cutting taxes, the Chinese have shown leadership
and a proactive response to the credit crisis.

GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish trend. TIP
- iShares TIPS- The U.S. government will have to continue to sell
Treasuries at record levels to fund domestic stimulus programs. The
Chinese will continue to be the largest buyer of U.S. Treasuries,
albeit at a price. The implication being that terms will have to be
more compelling for foreign funders of U.S. debt, which is why long
term rates are trending upwards. This is negative for both Treasuries
and corporate bonds.

VYM - Vanguard High Dividend Yield -VYM
yields a healthy 4.31%, and tracks the FTSE/High Dividend Yield Index
which is a benchmark of stocks issued by US companies that pay
dividends that are higher than average.

SHORT ETFS

LQD -iShares Corporate Bonds-
Corporate bonds have had a huge move off their 2008 lows and we expect
with the eventual rising of interest rates in the back half of 2009
that bonds will give some of that move back. Moody's estimates US
corporate bond default rates to climb to 15.1% in 2009, up from a
previous 2009 estimate of 10.4%.

SHY -iShares 1-3 Year Treasury Bonds-
On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere
north of +0.97% moves the bonds that trade on those yields into a
negative intermediate "Trend." If you pull up a three year chart of
2-Year Treasuries you'll see the massive macro Trend of interest rates
starting to move in the opposite direction. We call this chart the
"Queen Mary" and its new-found positive slope means that America's cost
of capital will start to go up, implying that access to capital will
tighten. Yield is inversely correlated to bond price, so the rising
yield is bearish for Treasuries.

UUP - U.S. Dollar Index -
We believe that the US Dollar is the leading indicator for the US stock
market. In the immediate term, what is bad for the US Dollar should be
good for the stock market. The Euro is up versus the USD at $1.2688.
The USD is down versus the Yen at 98.3480 and down versus the Pound at
$1.3834 as of 6am today.

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03/12/09 08:08 AM EDT

THE GOOD, THE LESS BAD, AND THE UGLY (PART III)

The “Delta” charts below display some of the “less bad” and stabilizing results we’re seeing in the gaming markets. Year over year monthly same store revenue growth is presented against a six month moving average to analyze the sequential deltas.

Not all gaming markets are moving in the right direction, however. We’ve separated the markets into the categories of The Good, The Less Bad, and The Ugly and have included the tickers of the companies with exposure to each.

The Ugly:• Las Vegas Strip – The only thing worse than the gaming revenue trends are the room rate trends. Unfortunately, room rates have higher margins. (MGM, WYNN, LVS)• Locals Las Vegas – Won’t overcome a 45% peak-to-trough housing crash this year. Population growth could drive 2010 revenues higher. This market should look Less Bad soon. (BYD)• Atlantic City – The economy, Pennsylvania, smoking bans, where do we begin? (BYD)• Mississippi – This was a tweener. We don’t have February data yet and I’m conservative so I’ll throw it in the ugly basket. (ISLE, PNK, PENN)• Macau – Looks can be deceiving. Tough Rolling Chip comparisons from an overflow of junket credit last year distorts the picture here. By September, this market may skip a category right to The Good. (LVS, WYNN, MGM)

No comment necessary.

Tough 2009 but 2010 could show positive growth

Ouch

Looks can be deceiving. Wait until September.

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THE GOOD, THE LESS BAD, AND THE UGLY (PART II)

The “Delta” charts below display some of the “less bad” and stabilizing results we’re seeing in the gaming markets. Year over year monthly same store revenue growth is presented against a six month moving average to analyze the sequential deltas.

Not all gaming markets are moving in the right direction, however. We’ve separated the markets into the categories of The Good, The Less Bad, and The Ugly and have included the tickers of the companies with exposure to each.

THE GOOD, THE LESS BAD, AND THE UGLY (PART I)

The “Delta” charts below display some of the “less bad” and stabilizing results we’re seeing in the gaming markets. Year over year monthly same store revenue growth is presented against a six month moving average to analyze the sequential deltas.

Not all gaming markets are moving in the right direction, however. We’ve separated the markets into the categories of The Good, The Less Bad, and The Ugly and have included the tickers of the companies with exposure to each.

The Good:

• Louisiana – I’ll have what they're having. Lower energy prices not making a dent on this energy economy. Hurricane relief and construction workers appear to be gambling. (PNK, BYD)• Missouri – They lost the loss limit and presto more revenues. (ASCA, PNK, PENN)

Positive Growth

Positive Growth

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03/11/09 03:17 PM EDT

In Mervyn King the UK Trusts?

Bank of England Governor King argued today that its newest measure to buy 2 Billion Pounds ($2.7 Billion) of government bonds with newly created money will “work in the long run” to prevent further deflation.

Today’s monetary action is the first installment in a 3-month plan of the central bank to spend as much as 75 Billion Pounds on bonds, whose maturities range from 2014-2018, and comes after officials cut the interest rate to a record low of 0.5% last Thursday.

King hopes that the “new money” being pumped into the financial system will work to help return inflation to the 2% target and promote what PM Brown stressed in late February, namely, that “domestic growth would come from granting loans to first-time buyers, entrepreneurs, and individuals of middle and modest incomes.”

For the UK to turn around the deflationary current, King is relying on UK Banks to pass the line of credit onto lenders. With data out today that the UK trade deficit widened in January to 7.7 Billion Pounds (from 7.2 Billion Pounds a month earlier) and the UK economy contracted 1.8% in the quarter through February, King will have to track more than just loans reaching Main Street to get a handle on controlling the inflation/deflation balance.

Matthew HedrickAnalyst

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